The work was the same as it had always been. The money arriving in the account, after one quiet change in the rules, was not.
The Scenario
You run a building and fit-out firm in Richmond. Eight years in the trade, a steady book of work refurbishing shops, offices and the occasional restaurant across Richmond, Twickenham and out towards Kingston. Most of your jobs come through two or three main contractors who know your work and pass it your way. You employ six people directly and bring in trusted subcontractors when a job needs more hands.
For years the rhythm of the money was familiar. You invoiced a contractor, added VAT on top, and that VAT sat in your account for a few weeks before you passed it on to HMRC. It was never your money, not really, but it was there, and it smoothed the lumps between paying your team on Friday and a customer paying you at the end of the month.
Then the way VAT works on your invoices changed, and nobody sat you down to explain what it would do to your cash.
The work carried on as before. The bank balance did not. Within two months of the change you were short on a payroll run for the first time in years, on a business that was, by every other measure, doing well.
At a Glance
- Client profile: Owner of a building and fit-out firm, Richmond, six staff plus subcontractors, eight years trading
- Situation: Cash shortfall appearing within weeks of the VAT domestic reverse charge applying to most of the firm’s contractor work
- Core issue: VAT that used to sit in the account as working capital no longer arrives; the customer accounts for it instead
- Cause: No change to invoicing systems or cashflow forecast when the reverse charge began applying; end-user status not confirmed in writing
- Resolution: Invoicing corrected, end-user confirmations obtained, cashflow rebuilt around the lower cash inflow, monthly VAT return position reviewed
- Outcome: Payroll pressure removed, a switch to monthly VAT returns to recover repayment positions faster, and a forecast that reflects how the money actually moves
What the domestic reverse charge actually changed
The VAT domestic reverse charge for building and construction services has applied since March 2021. It was introduced to tackle a particular kind of fraud, where a supplier charged VAT, collected it from the customer, and then disappeared without paying it to HMRC. The mechanism removes the temptation by removing the cash from the chain.
Under the normal rules, you charge VAT on your invoice, your customer pays it to you, and you pay it to HMRC on your next return. Under the reverse charge, you no longer add VAT to the invoice as a sum to be paid to you. Instead, your customer accounts for that VAT directly to HMRC, and reclaims it on the same return. For more on the underlying obligations, our VAT services page sets out how we support contractors with this.
It applies only between businesses that are both VAT registered and reporting under the Construction Industry Scheme, where the work itself falls within that scheme. It does not apply to everyone you invoice. The most important exception is the end user, the final customer who is not selling the construction services on as part of their own business. A property owner having their own premises refurbished is usually an end user, and for them you charge VAT in the normal way. The catch is that you must obtain that end-user status in writing, and keep it, or you are expected to treat the customer as though the reverse charge applies. Work that is zero-rated, such as a genuine new build, sits outside it as well, which is why this affects refurbishment and fit-out firms like yours more than it affects new-build trades.
The contractor who is caught out by the reverse charge has rarely done anything wrong. The work is the same, the margin is the same, and the VAT position is, in the end, neutral. What has changed is the timing of the cash. The VAT that used to sit in the account for a few weeks was never profit, but it was working capital, and when it stops arriving the gap is real even though the business is exactly as healthy as it was the month before.
Why the cash gap appears before anyone notices the cause
The reason this lands so quietly is that nothing about the work or the profit changes. Your day rate is the same. Your materials cost the same. Your profit on the job is the same. The only thing that changes is that a chunk of money you used to see arrive, and pass on later, no longer arrives at all.
For a firm doing a healthy volume of contractor work, that VAT was often several thousand pounds in the account at any given time. It was never yours to keep, but it sat there between the day a customer paid and the day you settled your VAT return, and businesses quietly come to rely on that float without ever deciding to.
When it disappears, the shortfall does not announce itself as a VAT problem. It shows up as a tight week, then a tighter one, then a payroll run that does not quite cover. By the time the pattern is clear, you have often been absorbing the gap from reserves for a couple of months and wondering why a busy, profitable business suddenly feels precarious. The cause and the symptom are far enough apart that the connection is easy to miss.
A worked example
Take a single invoice to a main contractor: labour of £25,000 and materials of £15,000, a net total of £40,000. The figures below show what reaches your account before and after the reverse charge applies, including a Construction Industry Scheme deduction of twenty per cent on the labour element.
The profit on the job has not moved. The VAT was never income. Yet £8,000 that used to flow through your account on this one invoice no longer does, and across a month of similar work that is the difference between a comfortable balance and a missed payroll. Once you can see it laid out like this, the fix is a forecasting and systems question rather than a crisis.
What clarity looked like
The first step was unglamorous: making sure every invoice was being raised correctly, with the right reverse-charge wording, the VAT shown but not added to the total, and both VAT numbers present. Several invoices had been raised the old way, which creates its own risk of VAT being accounted for twice.
Next came the end-user question. For the handful of jobs done directly for property owners rather than main contractors, we put a simple written confirmation in place so that VAT could correctly be charged in the normal way and the cash position on those jobs improved. Getting bookkeeping and cloud accounting set up to flag reverse-charge supplies automatically meant the position was visible every month rather than once a year.
Because the firm now often sits in a VAT repayment position, with little output VAT to set against the VAT on materials and overheads, we moved it to monthly VAT returns so that those repayments come back from HMRC faster and the cash works harder. The wider point, which our business advice team raises with every property and construction client, is that the forecast has to reflect how money actually moves, not how it used to. The Making Tax Digital requirements made the monthly discipline straightforward to maintain once the systems were right.
This is the same lesson, from a different angle, as the one in our case study on how a Kingston engineering firm found its loan account problem at year end, and the one on two restaurant sites and one hidden loss. In each, a profitable business was undone for a while by a number nobody was watching.
Frequently Asked Questions
How does the VAT reverse charge work for construction?
Instead of you charging VAT to your customer and paying it to HMRC, your customer accounts for the VAT directly on their own VAT return and reclaims it on the same return. You still show the VAT rate and amount on your invoice, with wording confirming the customer must account for it, but you do not add it to the total you are paid.
Who actually pays the VAT now?
The customer receiving your construction services accounts for the VAT to HMRC. For most reverse-charge supplies the net effect on VAT is neutral, because the customer declares the VAT and reclaims it at the same time, subject to the normal rules.
What is an end user and why does it matter?
An end user is the final customer who is not selling your construction services on as part of their own business, such as a property owner having their own premises refurbished. The reverse charge does not apply to end users, so you charge VAT normally. You must get their end-user status confirmed in writing and keep it on file, otherwise you are expected to treat them as though the reverse charge applies.
Does the reverse charge apply to new builds?
Work that is zero-rated for VAT, such as a genuine new build, sits outside the reverse charge. It mainly affects standard-rated and reduced-rated work, which is why refurbishment and fit-out firms feel it more than new-build trades.
Why has my cash flow got worse if my profit is the same?
The VAT you used to collect and hold for a few weeks before paying HMRC acted as working capital. It was never profit, but it smoothed the timing between paying your team and being paid by customers. When it stops arriving, the gap is real even though the underlying business is just as healthy.
Should I move to monthly VAT returns?
If the reverse charge leaves you regularly in a repayment position, with little output VAT to offset the VAT on your materials and overheads, monthly returns can bring those repayments back faster and ease cash flow. Whether it suits you depends on your mix of work, so it is worth reviewing with your adviser.
If this feels familiar
If your construction business is busy and profitable but the cash has quietly stopped behaving the way it used to, the reverse charge is often somewhere in the explanation. A short conversation can usually show you where the money is going and how to forecast around it. You are welcome to talk it through with the Xeinadin Richmond team.
A note on this case study
The case described here is drawn from composite client experience. The details reflect patterns we see regularly among owner-managed businesses across Richmond upon Thames, Twickenham, Kingston and the wider south-west London and Surrey area. Names and figures are illustrative and rounded for clarity, and they are not a substitute for advice on your own circumstances.
About the author
Donovan Crutchfield, ACA is the Area Managing Partner of Xeinadin’s Richmond office. He works with owner-managed businesses and high-earning individuals across south-west London and Surrey, helping them turn uncertain numbers into decisions they can act on with confidence.
